Registered: Dec 2003
Local time: 12:51 PM
Location: In my beautiful condo
1. Largest Trade Deficit Ever Will Lead to Fed Rate Hike
The U.S. trade deficit ballooned to a record $61 billion in February - driven by a rise in oil prices, Chinese textile imports and foreign-made pharmaceuticals.
Annualized, this means the U.S. is heading toward an incredible $717 billion trade deficit per year!
The growing deficit is clear when compared to last year's $549 billion deficit.
According to Bloomberg: "The 4.3% increase in the trade gap for goods and services followed a 5% rise in January to $58.5 billion, the Commerce Department said today in Washington."
Imports hit a record in February, due to intense corporate and consumer demand that will encourage the Fed to continue raising interest rates.
Foreign producers are satisfying the demand surge, leading some economists to lower their first-quarter growth forecasts.
"While we imported the necessities, we didn't sell a lot to the rest of the world," said Joel Naroff, president of Naroff Economic Advisers.
"As for the Fed, this report would likely mean more measured rate hikes."
Key to understanding the trade imbalance is the falling U.S. dollar. The U.S. can boost the dollar by raising interest rates - making the dollar more valuable.
2. 12 Last-Minute Tax Tips
By Jarret B. Wollstein
New tax laws create dramatic savings for investors, business owners and taxpayers in general. Taxes on dividends and business equipment purchases have been slashed. Don't miss out on these savings.
Last October, Congress passed two new tax acts that dramatically reduce your tax obligations in many circumstances. They are:
The Working Families Tax Relief Act of 2004 (WFTRA)
The American Jobs Creation Act of 2004 (AJCA)
The good news is that these acts - and other recent changes in the tax laws - contain lots of savings for investors, small business owners, families and taxpayers in general. However, as you will see, you have also lost some popular deductions.
Here's both the good and the bad news - plus a few other important last-minute tax tips:
1. Much Lower Taxes on Dividends
For 2005 thru 2007, the maximum you will pay on dividends is 15% if you are a U.S. citizen and are above the 15% tax bracket.
If you are in the 10 to 15% income tax bracket, your maximum rate on dividends is now 5%. Starting in 2008, if you are in the 10 to 15% tax bracket, you will pay no tax on dividends. (This change in dividends was made by the 2003 Bush tax cut.)
This shift in the tax laws means major savings for many investors. Prior to the new law, dividends were taxed as ordinary income, meaning you could have paid as much as 35%.
Even worse, combined with the tax on corporate profits (typically 35%), you could have ended up effectively paying a tax rate of 70% on dividends.
In response to this change in dividend taxation, many more stocks have begun paying dividends, and this definitely should be a consideration in your financial planning.
What are some good dividend stocks? There are many, but we prefer commodity funds and materials manufacturers.
2. Big Deduction for "Production Activities"
This new rule applies to production activities in the U.S., including sales, exchange, lease, rental or licensure of property, including farm products, films, electricity, potable water and engineering or architectural services.
Amounts are 3% for 2005 and 2006; 6% for 2007-2009, and 9% thereafter. This deduction is limited to 50% of wages you pay. Thus, if your 2005 3% deduction was $10,000, but the total you paid in wages was $15,000, you could only deduct 50% of $15,000 or $7,500 (rather than $10,000).
Exceptions: This deduction does not apply to retail sale of food or beverages, or leasing or renting property to a related party.
3. Much Faster Write-Off for New Equipment
Code section 179 of AJCA allows you to write off capital costs in the year of purchase, rather than over the useful life of the equipment (5 years, 10 years, etc.).
The 2001 Bush tax cut expands the value of this rule greatly by increasing the allowable write-off from $25,000 to $100,000 through 2007. Off-the-shelf computer software is now also included.
4. No Social Security Tax (FICA) on Stock Options
A recent notice by the IRS (Notice 2002-47, 2002-28 I.R.B. 97) states that until Congress says otherwise, employers don't have to withhold FICA or FUTA federal taxes when exercising stock options or employee stock purchase plans.
5. Small Business Can Now Have More Stockholders
IRS Code Section 1361 sets up special tax treatment for small business corporations.
The AJCA act makes it easier to operate a small business corporation by expanding the number of stockholders allowed from 75 to 100. It also counts "all members of the family" as a single shareholder.
6. A Tax Break for Hunters and Fishermen
The new tax laws greatly reduce excise taxes on the sale of hunting bows, arrows and fishing tackle boxes. Excise tax on sonar equipment for finding fish is also included.
7. State Sales Taxes Now Deductible
Under the new law, you can either:
(1) Deduct state and local taxes from your federal taxes (including state income and local real estate taxes).
(2) Claim a general sales tax deduction.
In computing the amount of the deduction, you can either use tables provided by the IRS or total up taxes from your receipts.
8. Expanded Deduction for Attorneys' Fees
Under the new law, you can deduct attorneys' fees paid in connection with various civil actions before you calculate your net taxable income.
This greatly simplifies deducting this common business expense.
9. Deduction for Cars, Boats and Planes Reduced
Previously, you could deduct the fair market value of your donated vehicles. That made contributing to charities both simple and potentially very beneficial, both for taxpayers and the charities.
Unfortunately, the charities often sold donated vehicles for far below the reported "fair market value," and predictably, it was only a matter of time until the tax laws took notice of this discrepancy.
Under the AJCA, as of January 1, 2005, you can deduct only the selling price of all donated cars, boats and planes. Further, you now need written verification from the charity of what your vehicle was sold for.
In addition to the selling price, your written verification must also include:
1) Your name and Social Security number
2) The vehicle identification number (VIN)
There are also new stiff penalties for providing fraudulent information about your vehicle's selling price.
Three More Important Tax Tips
10. Don't File Electronically
I know this might seem easier than filing by mail, but the problem is you have no paper trail proving you filed - and therefore no protection against horrendous penalties if the IRS claims they didn't receive your electronic filing. Yes, the IRS will send you a confirming e-mail, but that probably won't help you if they say they didn't get your return.
11. Don't Rely on the IRS for Tax Advice
A recent national study found that 70% of the time, when someone called the IRS they either got the wrong advice or no advice at all.
Further, following IRS advice does not protect you from late fees and penalties if the advice turns out to be wrong and you underpay. Even worse, IRS employees are trained to give you advice that will maximize your taxes.
If you prefer to minimize your taxes, go to a good accountant or attorney for advice.
12. Be Very Careful What You Say To Your Accountant
The government is now making an all-out effort to breach accountant-client confidentiality, so you can no longer count on what you say to your accountant remaining confidential.